Filing LLC after 3 years loss

[sethoffreshair]

My accountant has informed me that I can not declare another loss on my Single member Delware formed LLC or it could possibly trigger an audit.  What is the minimum amount the company can make after deductions to ensure this does not happen?  

[DavidD66]

There is not rule as to how much profit or loss will trigger an audit.  What your accountant is probably referring to is I.R.C. Section 183, which disallows any net loss from an activity conducted without a bonafide profit motive.  There is no single factor that is determinative, the regulations set forth nine factors the IRS will typically consider to determine whether a taxpayer has a profit motive.  According to the IRS:

You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether you have personal motives in carrying on the activity.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.

In addition, under the regulation, a profit motive is presumed when the activity has shown a profit in 3 of of the last 5 years.  If the presumption applies, the IRS has the burden of showing there was no profit motive by using the nine factors above.  If the presumption does not apply, the taxpayer has the burden of showing there was a profit motive.  

So, if your single member LLC is a legitimate business with a profit motive, you don't have anything to worry about, even if it has a loss for the fourth year in a row.  

[Opus 17]

There is a concern that if a business doesn't make a profit in most years, it might not be a legit business, it might be an improper tax shelter of some kind.  (My best friend in high school's dad ran a "catering business" out of his house that was mainly an excuse to buy high end kitchen appliances for personal use.)

However, you can always show, if audited, that your business is a real ongoing business and you either have losses on paper because of depreciation, but you are still making cash flow, or you have been having some down years, but it is still a real business.

I would never let fear of an audit be the main motivator for doing anything.  If you are a real ongoing business with a couple of bad years (and not a tax shelter or other dubious arrangement) then file an accurate tax return and deal with an audit if it happens -- if you file an accurate return and have all your documentation in order, you shouldn't have a problem. 

[sethoffreshair]

I was going to let the LLC lapse at the end of this coming year.  Do I have to file taxes from 2024 if there was no money in and no money being spent on it? 

[Opus 17]

---

@sethoffreshair wrote:

I was going to let the LLC lapse at the end of this coming year.  Do I have to file taxes from 2024 if there was no money in and no money being spent on it? 

---

Let me be clear about federal vs state.

The IRS wants to see a tax return if there is ongoing business activity (the business is actively engaged in trade or whatever the business is supposed to do).  Whether you make a profit or loss, if you are engaged in ongoing activities and have revenue or expenses, that needs to be reported on a tax return of some kind.  (Exactly how an LLC files depends on the organization and what you have done in the past--in most cases, a single member LLC that has not filed to be treated as an S-corp will file as a disregarded entity on schedule C. 

Even if you have no ongoing business activities, you may need to file a final return to close the business especially if you have any assets that you listed for depreciation.  You need to record how you dispose of those assets (sell, give away or convert to personal use) and that can in some cases create some taxable business income.  If you are working with an accountant, they really should be able to tell you.

Separately, your state may have filing requirements for the LLC, not necessarily a tax return, but there may be other reports, forms, or registration fees that need to be paid.  Check with your local state laws or ask your accountant.